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Jewish World Review Feb. 19, 2009 / 25 Shevat 5769 Rebalancing being put in different light By Gail Marks Jarvis
http://www.JewishWorldReview.com | (MCT) Normally at this time of year, financial advisers would be running their clients' money through an annual ritual that's almost a religion in the investing profession. It's called "rebalancing," the practice designed to make investors' money grow by doing the opposite of what feels good at the moment. For example, after last year, many investors feel comfortable shying away from stocks and clinging to Treasury bonds. But with rebalancing, their financial adviser would try to talk them into moving some money away from the safe bonds or bond funds and put it into stock funds. Historically, such a practice has tended to work well because stocks and bonds go through cycles - falling for a while, but then climbing at unpredictable times. Financial planners typically try to increase the chances that clients will be positioned for the upturn by rebalancing. But this year is unusual. With investors gun-shy about stocks and the economy struggling, many planners are putting their usual practice of rebalancing on hold. David Darst, the chief investment strategist of Morgan Stanley Global Wealth Management and author of "The Little Book That Saves Your Assets," said he wouldn't be in a hurry to rebalance: "You could start rebalancing, but in stages - taking little bites, or adding a little to stocks every quarter." Before he'd rush to rebalance, he said, he wants to be confident that the financial system will strengthen. To understand rebalancing, investors must realize the practice assumes investors set up their portfolios thoughtfully - dividing their money into stocks and bonds based on when they would need it for a goal, such as retirement. When stocks plunge, it upsets the original mixture, leaving a lower percentage in stocks than at the outset. Rebalancing restores the original mix. For example, Darst said a person who typically would have 60 percent of his or her money in stocks and 40 percent in bonds probably would need to move about 15 percent out of bonds to restore the 60-40 mixture. To assess whether you should rebalance, you have to do a gut check and be particularly careful if you are in or near retirement. Instead of rebalancing, you might have to cut back more on stocks if you're uncomfortable. Rather than the traditional fear that you will miss out on an upturn, many professionals are focusing on the consequences of a downturn. Some financial planners have learned that many clients were taking more risks than they could stomach. Glenn Kautt, a McLean, Va., financial planner, said one of his clients had 80 percent of his money in stocks prior to the downturn - an amount he did not consider overly aggressive because retirement was more than 15 years away. But in October, the person became nervous and Kautt cut back stocks to just 60 percent. When the client was still stressed in January, Kautt cut back again so the person will retain just 40 percent of his savings in stocks. Kautt won't change it when the stock market climbs because he learned that the individual becomes nervous during harsh downturns, and another could occur. For people in their 40s and younger, Kautt said he would rebalance and move money into stocks - perhaps having 70 percent in stocks if the person remained calm in this environment. A person with a 401(k) could do this without actually moving money: They could simply start putting new savings into stock funds. For retirees living off savings, Kautt has put rebalancing on hold because of "the unparalleled turbulence in the market." Retirees need to pull money from their savings each month for living expenses, and given the inability to predict the potential effect of downturns on those savings, he is keeping more in bonds and cash than he might have in the past. To understand how a retiree could survive with their portfolio, Kautt suggests this: Look at what you have in bonds and cash and assume you will use all of it during a lengthy bear market. How long would the money last? Say you have $100,000 in bonds and cash, and need to withdraw $1,000 a month. As you divide $100,000 by 12, you see your money could last just over eight years. That makes Kautt comfortable because bear markets tend not to last more than five years. But that's not always true, and Denver financial adviser Charles Farrell said he isn't assuming anything because the market is so unusual. Rather than rebalancing, he has geared back on stocks so that a retiree who would have had 50 percent stocks might have 30 percent now. Every weekday JewishWorldReview.com publishes what many in the media and Washington consider "must-reading". Sign up for the daily JWR update. It's free. Just click here. Gail Marks Jarvis is a personal finance columnist for the Chicago Tribune and author of "Saving for Retirement without Living Like a Pauper or Winning the Lottery." Comment by clicking here.
02/04/09: Diversification doesn't always offer insulation
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Arnold Ahlert | |||||||||||
